Peering Into the Black Box of Insurance Rating

Recently, the New York Timesreported that private health insurers continue to seek large premium increases despite seeing lower than expected use of medical care and booking record profits. The story highlights a significant problem for health policy: the lack of good, public information about how health insurers manage health care use and what they pay for medical services. As a nation, we rely on competition among largely private health plans to ensure that health care dollars are used efficiently and wisely, but truth be told, we do not know very much about how well they are doing.

Finding ways to meaningfully reduce the growth of public and private health care costs continues to be a vitally important issue for public policy. The growth of public health spending has dominated the recent debate about ways to reduce federal and state budget deficits, and critics of the newly adopted health reform act complain that it does not sufficiently address growth rates for private health care costs.

But it is difficult to develop public policies that might affect private health care costs without a good understanding of where the money goes and what the cost drivers really are. Unlike public programs, where cost and service use can be analyzed in some detail to inform policy decisions, public information about private health spending is mostly based on aggregate measures such as premiums or gross provider receipts. Details of private health transactions are largely held inside private insurers and away from public view. Public confusion and consternation over recent large rate increases in the nongroup market are a good example of this problem: despite intense public and political interest, there still is no answer to the question of why some nongroup carriers have repeatedly requested double-digit rate increases while other measures of health care costs, such as average premium changes for employer-based coverage or overall trends from the national health accounts, show much lower rates of growth.

This lack of information is not just a problem for policy, but it also limits the ability of policyholders to understand their insurance arrangements. This can be a particular problem today for people with nongroup insurance, who have the right to renew their policies but who may not be able to switch insurers if they have developed health problems. While insurers often point to underlying medical costs as the reason rates are going up, there are many decisions that insurers make that affect the premium increases that these individual consumers see. For example, insurers decide which policies are grouped together for rating purposes and when to stop selling a policy and begin selling new ones (which affects the quality of risk pools). Some insurers vary premium increases for nongroup policies based on how long a person has held the policy (called durational rating) or even on the policyholder’s claims in the prior year. Details about these practices often are not clearly explained to policyholders, leaving them confused about their premiums and how they may change in the future.

While not a complete answer, the rate review provision in the Patient Protection and Affordable Care Act (ACA) could provide a way for consumers and the public to see beyond premiums and to learn something about underlying health care cost trends for different services and about insurer practices and performance. The ACA requires that proposed premium rate increases that are unreasonable be reviewed and justified before they become effective. A thorough rate review involves assessing the level of use and per service cost for the major types of health care services and analyzing the impacts of insurer practices and other important factors that affect the premiums charged under a policy or group or policies. Having this type of detailed information from different insurers across different markets would assist analysts and policymakers trying to better understand what is driving the use and cost of medical care services, while the detailed explanation of rating factors and rating practices would help consumers understand whether the increases they are seeing reflect cost trends affecting all policies or particular decisions made by their insurer.

Final rules just released by the Centers for Medicare and Medicaid Services (CMS) require that a proposed rate increase in a state that exceeds a threshold amount (initially 10%) be reviewed before it takes effect to determine if the proposed rate is unreasonable. The review will be conducted by the state if it has an effective rate review process (as defined in the rule) or otherwise by CMS. Insurers are required to submit a preliminary justification providing summary information and a basic explanation of the reasons for the increase. This information will be made available to the public. In cases where CMS, rather than a state, is reviewing the increase, the insurer will also need to provide more detailed information and data to support the proposed increase. This additional information will also be provided to the public, subject to provisions in the Freedom of Information Act limiting the release of trade secrets. States conducting reviews could, but are not required to, make available to the public the more-detailed information that they receive in the course of their reviews.

The ACA and the final rule start down the road of making insurer experience and operations more transparent, but they stop short in many instances of providing the type of detailed information needed to support informed analyses of cost trends and market practices. One issue is the ACA itself, which limits review to unreasonable rate increases (CMS estimates that only about 14% of rate filings in the nongroup and small group market would be be subject to review and require submission of a justification). A second issue is that the information that must be disclosed under the rule is fairly simplistic in cases where states perform the review instead of CMS. For example, the consumer disclosure form developed by CMS requires insurers to disclose the expected cost trend for specific types of medical services (e.g., hospital inpatient, professional), but for rate increases that are reviewed by states, the list is not broken down by expected change in use and expected change in price for each type of service. This is pretty basic information for trying to understand how costs are changing and how insurers are reacting: changes in price raise issues about how much providers are charging for their services and how much insurers are willing to pay, while changes in use raise questions about the number and kinds of services that providers are ordering and insurers’ abilities to manage them. And while the disclosure form does require a brief, non-technical description of the proposed increase in these cases, including how changes in cost and use are contributing to the increase, the description appears to be intended for a consumer audience and is unlikely to be sufficiently detailed to support more detailed analyses by service type. Other important elements of the rate increase, such as the financial history of the product, are also addressed in this â€œbrief, non-technicalâ€ way. CMS does require much more detailed information and explanation to be filed and potentially disclosed in cases where they will be performing the review, but they estimate that they will perform reviews for only 28% to 36% of rate filings requiring review.

The final CMS rule directs the policy focus back on the states. In the past, getting information on rate actions has been difficult in many states, but this has been changing. A few states have increased public access rate filings since passage of the ACA, and grant funds from CMS may assist more states in doing so. The release of the final rate review rule may encourage more states to open up their rate review processes to shed more light into the black box of how health insurers set premium increases.